62: The Only Situation I Would Ever Pay a Referral Fee

Welcome to the 10 Loans a Month podcast, where mortgage brokers become business owners. And now, your host, Scott Peckford.

Hey, Broker Nation. So the topic is, should you pay referral fees? And I'm going to say in the vast majority of cases, it's going to be a hard no for me. Straight up no. And I'd probably respond like this. So if a financial planner, somebody asked me for a referral fee, I'd be like, hey, let's call him John. Hey, John, I can appreciate that. What I found is that when somebody says they want a referral fee, what they're really trying to do is they want to make more money.

And what I've found works best is that if you and I work together well, there's tons of opportunities for us to refer business back and forth. And I'm sure you'd much rather be getting paid on, insert whatever they do, instead of getting a little bit of money on a referral fee. So I'm probably going to.

do that. And I'm going to lean towards that. And in my own mortgage practice, I've had a couple of referral relationships, but in most of the time we just built a relationship based referral based business that was built on mutual trust and respect. And we never did referral fees, but.

There are situations where it can make sense. And that's what I want to talk about, because I would say up until, you know, not that long ago, I probably would have just been hard. No, you know, this would have been a really easy answer for me. I was like, no, forget it. But I have seen situations and I've seen business models where a referral fee can help you accelerate the growth of your business, which I will dive into in a sec.

A couple of things, though, you've got to think about. There's a few questions you've got to ask yourself. And the first one is, is it legal? Right. So it may not be legal where you are. So in the U.S., for instance, they've got RESPA and you're going to get fined and lose your license. So you can't just pay a referral fee. So first off is if you're looking.

at this as a business building model, is it legal? That's the first question. And is it legal in your state province? And then is it allowable with the company you're with? There may be a policy in place where they're like, no, you can't do that. So you got to make sure first off that it's legal.

Then the second thing you got to ask yourself, what are the disclosure requirements? So what do I have to disclose to the borrower? Do I have to tell them? And what does that look like? Do I tell them the percentages or tell them the amounts? And again, this is going to vary from location to location and make sure you do this properly, paper it properly if you're going to do this otherwise.

you run the risk of getting yourself in trouble. And then the next thing I'm going to ask myself, so those two things are a pass. The next thing I'm going to ask myself is, is this just a one-off deal? So if is this a financial planner or somebody who's kind of struggling in their own business and they need my money to support themselves?

By the way, that's not a good sign in most cases because if they need your money to survive, they're probably not going to be a great referral partner. And so, you know, if it's a one-off deal, I'm not interested in that at all. Again, hard no. So is it legal? If it isn't, hard no. You know, the disclosure requirements, can I meet? those or there's something i'm comfortable with if not no it's just a one-off deal or if this is a week

you know, referral partner, it's going to be a hard no. The only exception that I would have to this is if there was an opportunity for a big contract, so a monster referral source. So I'll give you an example of this. So Jim DeLucas, many of you know who he is, and so he's been on some of my podcasts in the past. So when he first got into the mortgage business,

He got to $100 million probably faster than anybody that I know. And so what he did is he went out and created corporate contracts with a financial planning firm that had thousands of agents and relocation companies. And so you could call that a referral fee, a corporate contract.

equals a referral fee by the way a referral fee equals advertising like all these things there's no difference it's just we put a different word on and all of a sudden it's like oh that's terrible but it's like there are completely valid business models where mortgage brokers spend money on advertising to get business

So is it a referral fee? They're paying money to whoever the advertiser is to get the business. So you can call it the same thing. Corporate contract, exactly the same. So Jim took his business from zero to 100 million.

very quickly because he went and set up a corporate contract so this is the only situation where i think it would make sense and if you're going to do a corporate contract they have to be a monster referral source first second must have a contract in place this cannot be a one-off hey this is what we're going to do handshake

deal because you structure your business to support that volume. And then all of a sudden they decide to leave you for five bucks more. Somebody else comes along and says, I'll pay five bucks more and you're screwed. You need to have a contract in place that says, I get all of your business. under these conditions for x period of time or y period of time right so there needs to be a contract in place and the contract has to also outline are you paying on the first referral or is it repeat

So, you know, as the mortgage business, there's a lot of repeat business. And so most of the time, and I personally would not be interested in a contract where I've got to pay for that client forever and ever. I'll pay the one time. Right. No different than the bank is paying you a referral fee for that client. So, again, go back to, oh, this is terrible. It's like, no, no. Well, the bank pays you. They call it a commission. Change the word. All of a sudden, it doesn't feel icky.

They pay you referral fee for bringing them a client. Now, you know, I want a monster referral source. I got to have a contract. And then once I have paid that first fee, I own the client and I own any referrals from that client. I don't want them having such deep.

fingers into my business that it doesn't make financial sense. And then finally, it has to be a percentage that is viable for the business. 50% is not viable in any case. There's no way you're going to pay 50%. And this is what this person was asking.

That is in any way sensible. So most of the time, 90% of the time, I'm going to say no to paying a referral fee. However, there is a very limited situation where I would do it. And as I said, make sure that it's legal. Make sure that it's disclosed properly.

Make sure that it's a monster referral source and that you have a contract in place and you outline all of the nuance of it so that this is actually a professional. It's not like we're talking about just this. Hey, buddy, you remember that Sesame Street episode? We're left to be like, hey, you want to buy a bag of air, you know?

which is actually kind of hilarious because they sell air now. And I know a guy who sells air that he bottles and Whistler sells to China. I digress. But the point is, I don't want some sleazy thing going on. It has to be a contract. It has to be done properly. And in a very narrow set of circumstances, I would.

say yeah it can make sense and again you got to think about what that percent looks like and it's going to be a good business case for it so hopefully that helps you if you're listening and if you want to build a referral based mortgage business which is my specialty i've always built my business as referral based not ad based or even corporate contract based

Neither one of those are bad, just different. Go check out 10loansamonth.com. We have a whole bunch of coaches there that are amazing at building referral-based businesses. And we only open a few times a year. So if you get on the wait list, when we open up spots again, you'll be able to get an invitation to find out what we're all about. Check that out. And thanks again for checking out this episode. This is an I Love Mortgage Brokering production.